The Monday Report – 01 November 2021

This story features RESMED INC, and other companies. For more info SHARE ANALYSIS: RMD

The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

World Overnight
SPI Overnight	7348.00	+ 68.00	0.93%
S&P ASX 200	7323.70	– 106.70	– 1.44%
S&P500	4605.38	+ 8.96	0.19%
Nasdaq Comp	15498.39	+ 50.27	0.33%
DJIA	35819.56	+ 89.08	0.25%
S&P500 VIX	16.26	– 0.27	– 1.63%
US 10-year yield	1.56	– 0.01	– 0.70%
USD Index	94.12	+ 0.76	0.81%
FTSE100	7237.57	– 11.90	– 0.16%
DAX30	15688.77	– 7.56	– 0.05%

By Greg Peel

RBA MIA

The futures had said up 18 points on Friday morning and indeed the ASX200 was up 17 points at the open, for a couple of minutes, and then it was Goodnight Irene.

Initial selling could possibly be attributed to three factors: -4% aftermarket falls for Apple and Amazon flagged a possible weak session for the S&P500 on Friday night, not that there’s any read-through to our market from those two stocks; it was the last day of a solid month, so profit-taking was on the cards; and bond yields were on the rise again.

The selling really kicked off with the release of June quarter PPI data. Wholesale inflation rose by 1.1% in the quarter when 0.3% was expected. The annual rate rose to 2.9% — the fastest rate in a decade.

Driving inflation were rising wages and material costs in engineering construction, with major state infrastructure projects underway, rising wages and costs in housing construction, amidst strong housing demand, and rising oil refining costs, with oil prices having run hard in the quarter.

The bond market had already been testing the RBA’s resolve to continue to hold short-end rates down with bond purchases, but on Thursday, post Wednesday’s CPI numbers, there was no sign. On Friday, the bond sellers went again, and there was still no sign of the RBA.

The Aussie two-year rate, which is meant to be capped at 0.10%, jumped another 20 basis points to 0.68%. The five-year rose 11bps to 1.57% and the ten-year rose 20bps to 2.04%. The last time the ten-year was above 2% was March 2019.

In the stock market, selling was very uniform across sectors, with the one exception. Healthcare only fell -0.1% because ResMed ((RMD)) rallied 4.2% on its quarterly result.

It was a gimme that yield-paying sectors would suffer on higher yields, and indeed staples fell -1.3%, telcos -1.9%, utilities -1.3% and property a full -2.6%, with UR Westfield ((URW)) the worst index performer on the day in falling -6.2%.

Banks and insurers by rights enjoy higher rates, and that had been evident during the week until Friday, when financials fell -1.8%. Banks, too, are dividend payers.

Technology suffers from higher rates being a growth sector, so despite the Nasdaq being up 1.4% on Thursday night, and perhaps with a nod to falls in Apple and Amazon, technology fell -1.7%.

The big miners are very big dividend payers and oil companies aren’t bad either, so materials fell -1.0% and energy -1.8%.

But, while the surge in bond yields can explain all of the above, and it’s all eyes on RBA at the lunch party tomorrow, the evidence still suggests this was more about end-of-month profit-taking (aided by momentum algos) than anything else.

The clue is the ASX200 fell -1.4% on Friday when the S&P500 was up 1.0% overnight, and with the S&P up only 0.2% on Friday night, our futures were up 0.9% on Saturday morning.

One Bad Apple

Well two actually. Having fallen -4% each in Thursday’s aftermarket Apple closed down -1.8% on Friday night and Amazon -2.2%. Any fears of the two triggering selling were quickly quashed as all other Big Tech names were bought.

Microsoft rose 2.2% to pip Apple as America’s biggest company, for now. The Nasdaq and S&P both posted new record highs. Rather than profit-taking after the best month for Wall Street since November last year, it seemed window-dressing was the game.

Wall Street shrugged off a 4.4% annual gain in headline personal consumption & expenditure (PCE) inflation and a 3.6% gain in the Fed’s preferred core rate to the highest numbers since 1991, probably because no one’s shocked anymore and at 0.3% and 0.2% month-on-month gains respectively, the pace of growth is slowing from prior months.

Swinging from monetary policy to fiscal policy, sentiment was boosted by news the Democrats seem to have reached a deal on the infrastructure bill, meaning it should be passed this week. If I had a dollar…

The bill will be much toned down on the spending side, but then this should be favourable for the Republicans, and most of the scary tax hike threats have been abandoned, although a 15% minimum corporate rate might be a sticking point.

G20 leaders spoke about little else in Rome over the weekend, noting climate discussions will be separate from tonight in Glasgow, so a global 15% minimum tax looks like it might just be a goer.

Among the day’s corporate earnings results, Chevron (Dow) rose 1.2% following a beat on everything, thanks to the quarter’s surging oil and gas prices, while Starbucks missed and fell -6.2%, hit by rolling lockdowns in China, which the CEO deemed “transitory”.

Brave words.

The US ten-year bond yield dipped -1 point to 1.56%, meaning the spread to the Australian equivalent is almost a full half percent. This should have the Aussie dollar surging, but the US dollar index surged instead, up 0.8%, so the Aussie is down -0.3%.

The Fed meets this week, just after the RBA meets, so it should make for some interesting times.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1784.30	– 14.60	– 0.81%
Silver (oz)	23.89	– 0.16	– 0.67%
Copper (lb)	4.46	– 0.03	– 0.59%
Aluminium (lb)	1.24	+ 0.02	2.04%
Lead (lb)	1.10	– 0.01	– 0.90%
Nickel (lb)	8.82	– 0.21	– 2.30%
Zinc (lb)	1.55	– 0.00	– 0.08%
West Texas Crude	83.57	+ 0.44	0.53%
Brent Crude	83.72	– 0.78	– 0.92%
Iron Ore (t)	106.75	– 6.40	– 5.66%

With Beijing continuing to interfere in thermal coal and iron ore markets, the thermal coal price is now in freefall and iron ore was down another -5.7% to near the US$100/t mark once more.

Note that China refuses to buy our thermal coal, so it only matters what the rest of the world wants to pay for it.

Aluminium saw some reprieve after a tough week.

The Aussie is at US$0.7518.

The SPI Overnight closed up 68 points or 0.9%.

Note that November 2021 will cycle November 2020 – the month stock markets around the globe took off ("value trade") on the Biden election and the Moderna/Pfizer vaccine announcements.

The Week Ahead

Today locally we’ll see numbers for job ads, house prices and housing finance and then tomorrow is the biggest carnival of the year, as we find out just what the RBA is up to.

Victoria will be closed, of course.

We’ll see building approvals on Wednesday and then the RBA will follow up on Friday with a quarterly Statement on Monetary Policy, which may be subject to frantic rewriting as we speak.

The Fed statement on tapering is due on Wednesday night and then the Bank of England meets on Thursday night.

It’s the first of the month so we’ll see global manufacturing PMIs today and services PMIs on Wednesday. Friday’s data showed China’s manufacturing PMI slipped in October to 49.2 from 49.6 and services to 52.4 from 53.2.

The US will see private sector jobs numbers along with factory orders on Wednesday, trade on Thursday and Non-farm payrolls on Friday.

On the local market, Westpac ((WBC)) reports earnings today, followed by CSR ((CSR)) and Pendal Group ((PDL)) on Thursday and Amcor ((AMC)) and News Corp ((NWS)) on Friday.

There are still AGMs to get through this week, but the numbers will now drop right off.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
A2M	a2 Milk Co	Upgrade to Neutral from Underperform	Credit Suisse
ANZ	ANZ Bank	Upgrade to Neutral from Sell	Citi
CHL	Camplify	Upgrade to Add from Hold	Morgans
COE	Cooper Energy	Downgrade to Accumulate from Buy	Ord Minnett
DEL	Delorean Corp	Upgrade to Speculative Buy from Hold	Morgans
JBH	JB Hi-Fi	Upgrade to Outperform from Neutral	Macquarie
ORI	Orica	Upgrade to Overweight from Equal-weight	Morgan Stanley
PBH	PointsBet	Downgrade to Hold from Buy	Ord Minnett
REH	Reece	Upgrade to Neutral from Underperform	Macquarie
		Upgrade to Hold from Reduce	Morgans
		Upgrade to Buy from Lighten	Ord Minnett
RWC	Reliance Worldwide	Upgrade to Outperform from Neutral	Macquarie
		Upgrade to Buy from Neutral	UBS
SGF	SG Fleet	Upgrade to Outperform from Neutral	Macquarie
SGM	Sims	Upgrade to Buy from Neutral	UBS
WAF	West African Resources	Upgrade to Outperform from Neutral	Macquarie
WOW	Woolworths Group	Downgrade to Sell from Neutral	UBS

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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